India: 5:25 Refinance Scheme

Last Updated: 6 November 2015
Article by DSK Legal

Key aspects of Reserve Bank of India’s Circular on Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries

In India, commercial banks serve as the main source of long term debt for new and existing projects in the 'infrastructure' and 'core industries' sectors. Financing by commercial banks are generally limited to a maximum tenor of 10 to 12 years.

However, due to the nature of the projects in the infrastructure and the core industry sectors, it becomes difficult to service the debts over this period and discharge all liabilities in relation thereto as there exists mismatch in the term of the debts and the completion of the projects. Therefore, it was important to frame a policy for providing longer period for servicing of the debts.

In light of this, the Reserve Bank of India (RBI) on July 15, 2014 released the Circular on 'Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries' (RBI Circular) notifying a framework applicable to all scheduled commercial banks, for flexible structuring of long term loans to projects in the 'infrastructure' and 'core industries' sectors. Initially, the RBI Circular was made applicable to loans sanctioned after the date of notification of the RBI circular.

However, through separate circulars, thereafter, the scheme was made applicable to existing loans subject to certain conditions of eligibility and similarly, also to Non-Banking Financial Companies (NBFCs).

The RBI Circular is generally referred to as the 5:25 Refinance Scheme (Scheme). The Scheme aims to increase long term viability of such projects, reduce asset liability management (ALM) issues, reduce repayment stress, encourage efficient sharing of exposures by banks and NBFCs at various stages of the economic life of the projects and improve the credit ratings of such projects.

The RBI has allayed fears of banks and NBFCs and clarified that the refinancing of long term projects in accordance with its recommendations and suggestions under the Scheme will not be construed as 'restructuring'. Further, the repayment, whether, a one-time bullet payment or not, will be allowed to be accounted in the appropriate maturity buckets in accordance with the RBI disclosure norms for ALM.

The RBI has also recommended before that the date of commencement of commercial operations of the project (DCCO) should be documented at the time of appraisal of any loan facility and by financial closure.

The recommended structuring of long term tenor loans towards infrastructure and core industries sectors of the economy, and other recommendations of the RBI in this regard are as hereunder:

1. The fundamental viability and health of these projects on the basis of various financial and non-financial metrics including interest coverage ratio, debt service coverage ratio etc., across the economic life of the project should be calculated by the banks and the NBFCs in order to estimate ability of the project to repay the loan facility. The economic life of projects in such sectors of the economy may range from 25 to 30 years. Risk management studies should be conducted by the banks and NBFCs in consideration that refinancing may not be taken up by new banks and NBFCs.

2. At the time of appraisal of such loans, banks and NBFCs may fix the amortisation schedule across the economic life of the project and also so as to ensure the upkeep of the health of the project at all times and even in stress situations.

3. The tenor of the amortisation schedule should not be more than 80% of the economic life of the project for public-private partnership (PPP) infrastructure projects. For non-PPP infrastructure projects, the user charges and/ or tariff will be determined in terms of 80% of the economic life of such projects. For core-industries projects, the tenor shall be for 80% of the economic life of the project as estimated by the Lenders' Independent Engineer.

4. The loan facility (Initial Debt Facility) will be provided to ensure access to capital during the initial construction period and the period up to the DCCO to be refinanced thereafter (Refinanced Debt Facility) after a medium term of 5 to 7 years corresponding to the amortization schedule.

5. The relevant Refinanced Debt Facility should be equal in present value to the residual payments corresponding to the amortisation schedule will be provided by new or existing banks/NBFCs or a combination of both. The relevant Refinanced Debt Facility could also be structured as a bullet repayment if the intent of refinancing is declared upfront.

6. Modification of the amortisation schedule is allowed only once after DCCO with respect to that loan facility, if the actual performance of the project company is different from the assumptions made at the time of financial closure. Such modification would not result in 'restructuring' if the loan is classifiable as 'standard', the net present value of the loan facility remains the same before and after the modification, and the overall Amortisation Schedule remains within 85% of the initial economic life of the project.

7. If the Initial Debt Facility or the Refinanced Debt Facility becomes a non performing asset (NPA) at any stage, further refinancing would be put on hold and the bank or NBFC holding the loan would be required to recognise the loan facility as an NPA. Banks and NBFCs are allowed to determine the pricing of the loan facility taking into account the risks involved, though the pricing should not be less than the base rate of the bank or NBFC.

However, this Scheme would only be applicable for projects where the aggregate exposure of banks and NBFCs to the project company exceeds Rs. 500 Crore.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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